MORGAN STANLEY: Buy Netflix for these 2 reasons

Netflix expanded its service to
130 new countries in January, but when it comes to
international growth, the company will be reaping the benefits
for years, according to Morgan Stanley.

Netflix already counts on growth overseas for most of its
subscriber additions. The company predicts that it will add 2.5
million subscribers in the current quarter, only 500,000 of whom
will come from the US.

But in a research note Monday, Morgan Stanley's Benjamin
Swinburne said it takes about three years for Netflix to ramp up
subscriber count in a new market.

"In all markets three years or older, (Netflix) has reached
well above double-digit penetration and is generating profits,"
Swinburne said.

He points to markets like Brazil as an example, writing that it
"accelerated after years of fairly modest growth."

The potential for international expansion is a key part of
Swinburne's case that Netflix shares are worth about 25% more
than they now fetch. He reiterated Morgan Stanley's overweight
rating on the stock, with a $125-a-share price target.

In the chart below you can see the big ramp-up in Latin America
after the third year.

Morgan Stanley

Also supporting his bullish case
for Netflix, Swinburne mentioned increasing the value of each of
the existing subscribers. Netflix has raised its prices, but more
than half of its US subscribers still pay below the current rate
because they signed up before the latest increases. It plans to
spend the rest of 2016 rolling those members into the higher-rate
plans.

"With domestic (average return
per user) growth poised to accelerate as more grandfathered
pricing expires in 3Q16, we expect gross profit per sub growth
and gross margin expansion to re-accelerate in 2H16 and beyond,"
Swinburne wrote.

Increasing the return per user
only helps increase the upside potential Netflix created by
expanding into new countries. And when you include the price
increase some grandfathered users will experience later this
year, there is more than one way the company can increase its
revenue per user.